Copper price in renminbi rout

Copper price in renminbi rout

Fears of a Chinese currency devaluation stalks the copper market

It's been a brutal new year for copper with March futures in New York losing as much as 4.7% to dip below $2.00 a pound on Thursday before recovering slightly in early afternoon trade. That was the lowest since March 2009 and the fall comes on the back of a 26% decline in 2015. The metal traded below the $2-level only for a brief seven months at the height of the global financial crisis. It took just 18 months to climb its way back to a record of nearly $4.50.

Thursday’s gap down came after a fresh plunge on Chinese equity markets and fears that the country may be undertaking a stealth devaluation of its currency to boost a rapidly slowing manufacturing and export sector. Data released today also showed the country's forex reserves dropped by nearly $108 billion in December, the biggest decline on record bringing total holdings to $3.3 trillion, the lowest level in three years.

Given its widespread use in the communication, transportation, manufacturing and construction industries copper is perceived as a bellwether for the mining and metals sector as a whole. China is responsible for nearly half of global metals demand and a weaker currency would put further pressure on dollar-denominated commodities.

Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management summed up the risk associated with a sliding renminbi for CNBC:

Any PBOC devaluation (or market-led depreciation) could cause a domino effect across the world. Other countries could be forced to lower the value of their own currencies to remain competitive with China.

The U.S. dollar would then spike on a relative basis, and that would in turn swell the value of dollar-denominated commodities and corporate debt — which would likely grind global growth to a halt.

The apparent Chinese decision to allow for a drop in the yuan "will be very detrimental to the global economy," Chovanec predicted. "If everybody gets into the act, it's a risk they push the U.S. into recession."

Copper bulls found some solace yesterday following news that Beijing is starting a program to support the country’s struggling copper smelters and producers.

According to a report in the Financial Times, China’s State Reserve Bureau is planning to buy up 150,000 tonnes from refiners who after years of rapid expansion is now coping with oversupply and unprofitable operations.

But the SRB’s actions may not be enough to counter negative sentiment in the market. Xiao Fu, an analyst at BOC International in London, a unit of Bank of China, told the FT that “since 2013, episodes of SRB purchases have supported the copper market temporarily but not enough to reverse a cyclical downturn.”

Image of dragon statue in Shanghai covered in coins by joelwillis